A year and a half ago, Jamba
So Jamba made its deal with the devil, and issued $35 million worth of convertible preferred shares. Like any Faustian bargain, I suppose, there is some good and bad involved -- and we're beginning to see both play out.
Preferred shares have characteristics of both debt and stock. On the one hand, the shares earned an 8% annual cumulative dividend, meaning that if the company couldn't pay the dividend at any point, it would still accrue, and Jamba would be on the hook to pay it later – similar to a bond's coupon. On the other hand, the shares -- individually priced at $115 -- could be converted into 100 shares of common stock priced at $1.15 apiece.
This arrangement was not too different from the one Berkshire Hathaway's
The Jamba deal is of course much smaller in scope, but still costly. In the last quarter, the company reported net income of $1.6 million, but , but the preferred dividend cost it nearly $600,000. Without the dividend, earnings available to common shareholders would have been substantially higher.
The good news for cash flow? Unlike Warren Buffett, the preferred shareholders don't seem interested in holding their investment for the long term. Since the issue, more than 100,000 preferred shares have been converted to common stock and sold year to date -- representing more than one-third of the initial stake. Each conversion means money saved on dividends that no longer have to be paid.
Unfortunately, each conversion and sale also means a stock dilution. If all of the preferred shares (as of the last report) get converted, the number of common shares will rise to some 83 million -- a 40% dilution.
The preferred share issue was necessary at the time, but as the company recovers, it will prove to be a burden. Fortunately, that burden seems to lightening -- even if that development comes with its own problems.
Fool contributor Jacob Roche is a Jamba shareholder and is happy to see the dividend go. He holds no other position in the companies mentioned. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.